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ETF Specialist

Improving ETFs Following the Flash Crash

The May 6 market disruption shows ETFs need a more robust market-making mechanism.

Assigning blame for last Thursday's "Flash Crash" will take considerable resources and many months, and the conclusion is unlikely to single out a primary culprit. A probable conclusion is that the momentary lapse in the market's collective reason is a symptom of a systematic gap to accommodate the increasingly complex nature of securities markets.

Many predicted years ago that relying almost exclusively on computers, rather than humans in a trading pit, would lead to eventual market meltdowns. The human element of sound reasoning and seat-of-the-pants judgment would be necessary to facilitate a functioning market in periods of great duress. During these critical moments, it appears the critics were right. Simply transitioning from a computer-based system to the "slowdown" mode, in which humans are more involved, resulted in a momentary but monumental collapse on May 6.